Construction Spending Falls Less Than Expected

January 5, 2009 - 11:54 AM
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Washington (AP) - Construction spending fell less than expected in November as record activity on nonresidential projects helped offset another steep decline in housing. The outlook, however, is for significant weakness as the worst recession in at least a quarter-century takes its toll on construction.
 
The Commerce Department reported Monday that construction spending dropped by 0.6 percent in November, less than half of the 1.3 percent decline economists expected. A 4.2 percent fall in housing construction was partially offset by a surprisingly strong 0.7 percent rise in nonresidential activity.
 
But economists expect housing, which has been in a slump for two years, will continue to struggle in the months ahead. They also are concerned that nonresidential projects will falter as developers deal with a severe financial crisis making it hard to get financing amid a yearlong recession that has curbed the appetite for new shopping centers and office buildings.
 
The 0.6 percent decline in total construction followed a 0.4 percent drop in October. The October performance was revised upward from an original estimate that construction had dropped 1.2 percent that month.
 
The back-to-back declines left construction at a seasonally adjusted annual rate of $1.078 trillion, down 3.3 percent from a year ago.
 
The prolonged weakness in housing, where the current economic troubles began, is showing no signs of bottoming out. Sales of both new and existing homes along with home prices are continuing to plunge, while rising foreclosures are dumping more unsold homes on the already glutted market.
 
For November, the 4.2 percent drop in home construction left residential activity at a seasonally adjusted annual rate of $328.3 billion, down 23.4 percent from a year ago.
 
The nation's homebuilders have been reporting large financial losses as demand keeps falling even as they slash production. Hovnanian Enterprises Inc., based in Red Bank, N.J., reported last month that its fiscal fourth-quarter loss totaled $450.5 million as revenue fell by 48 percent.
 
The 0.7 percent rise in nonresidential building left the sector at an all-time high of $428.2 billion at an annual rate, following a 0.4 percent drop in October. But economists are forecasting more declines as the prolonged recession cuts demand for new shopping centers and office buildings, and the worst financial crisis since the 1930s makes it harder for builders to obtain financing.
 
Nearly 40 percent of real estate investors need to refinance part of their portfolios this year, according to more than 1,100 investors surveyed in October by Marcus & Millichap Real Estate Investment Services and National Real Estate Investor magazine. The investors also expect prices to decline 15 percent on average this year.
 
General Growth Properties Inc., the country's second-largest mall owner, last month hired a commercial real estate firm to put prominent retail centers in Boston, New York and Baltimore up for sale in a desperate attempt to shore up its finances. The Chicago-based company is saddled with huge amounts of debt it took on during the market's boom years when it aggressively bought assets.
 
Meanwhile, government spending kept rising in November, climbing 1.4 percent to a record annual rate of $321.95 billion. State and local construction rose by 1 percent to a record annual rate of $295.2 billion, while federal construction was up 6 percent to an all-time high of $26.8 billion at an annual rate.
 
President-elect Barack Obama is pushing for a massive stimulus plan to keep the economy from falling into an even deeper recession. Part of that plan would involve increased spending for "shovel ready" infrastructure projects including roads and bridges.